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What fossil fuel subsidies?

18 June 2012

1:30 PM

18 June 2012

1:30 PM

The environmental movement hasn’t responded well to the setbacks it has suffered seen since the failure of the Copenhagen climate conference.  The #endfossilfuelsubsidies campaign — trending worldwide on Twitter this morning — is the latest example of their descent.

To be clear, fossil fuel subsidies are not a good idea; that is why governments like ours don’t offer them. Fossil fuels are huge cash cows for every western government.  When someone fills up their car with petrol, around sixty per cent of the pump price goes to the Exchequer. When an oil company drills in the North Sea and extracts a barrel the amount that the Treasury gets varies but it is invariably a substantial share of the price, and the sector was raided again at Budget 2011. The idea that fossil fuels are subsidised by the British government is silly. To the extent that there is support, it is for things like carbon capture and storage designed with environmental objectives in mind.

The comparisons that organisations like Bloomberg New Energy Finance draw between global fossil fuel subsidies and global renewable energy subsidies are laughable for two reasons, which I looked at in my book, Let them eat carbon.

First, the renewable subsidies and the fossil fuel subsidies don’t really compete with each other. Fossil fuel subsidies are overwhelmingly paid in developing economies. The economics of an offshore wind farm in Britain are nothing to do with a subsidy that makes it cheaper for a Chinese or an Iranian motorist to fill up their car.

(See page 2 of this IEA document to enlarge.)

Second, you have to adjust for the amount of energy produced by fossil fuels and renewable sources. Otherwise you are just getting confused by the size of the two sectors and not really identifying which is more of a subsidy junky. Statistics in Britain are poor, but, in the United States, the Energy Information Administration compared relative subsidies and gave figures for subsidy and support by fuel in dollars per megawatt hour in 2007.

As this study makes clear, the principal sources of energy that environmentalists want to curb receive less in subsidies for each megawatt hour generated than the sources which they promote. Coal gets $0.44 /MWh and gas $0.25 /MWh, while solar got $24.34 and wind $23.37. These days, particularly when you include some of the incredibly generous state mandates, the picture will likely be even more extreme in the United States. And the subsidies here are incredibly generous. Offshore wind gets the best part of £100 /MWh just from the Renewables Obligation and new solar installations have been getting a staggering £400 /MWh from the feed-in tariff.

Ending fossil fuel subsidies is a perfectly reasonable cause. But I don’t think that many of the activists currently littering Twitter are going to take their protest to Beijing or Tehran, where the critical decisions over these subsidies are made. Instead they are just trying to sell the public a delusion that the affordability of fossil fuels relative to their beloved panels and turbines is the result of some corporate conspiracy. It is all a long way from the grand, rational, science-based policy that was supposed to be the environmentalist legacy.

Matthew Sinclair is Director of the Taxpayers’ Alliance

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